MiFID: Financial borders fall but small firms must beware

Minnows won't benefit much

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Pan-European regulation of large sections of the financial services sector comes into force today, but the benefits of the system will largely pass smaller firms by, according to the British Banking Association (BBA).

The Markets in Financial Instruments Directive (MiFID) is a European Union directive aimed at allowing financial services firms to compete across Europe's borders. It says that financial services firms should be able to operate across Europe as long as they are accredited and regulated in their home country.

The UK is one of only three EU nations to have met the deadline for turning the Directive into law of 31 January 2007, and the law comes into force today.

The BBA warns, though, that only the bigger financial institutions will realistically benefit from the change. "Smaller financial institutions, particularly non-banks, will be less well-placed to derive any significant benefits from MiFID," said the organisation in a statement. "The high implementation costs needed to maximise their opportunities may exclude them from changes for the moment."

The BBA said the companies most likely to benefit are larger firms, who have an opportunity to increase the size and scope of their business.

"Large banks and exchanges are best placed to benefit for the coming changes. Many of them have followed the negotiations closely and have well-developed project teams in place. The bigger the bank, the lower proportionately are the implementation costs."

The change will affect all financial services firms offering services such as share trading and investment advice, whether they want to trade across Europe or not. Financial regulator the Financial Services Authority (FSA) is changing its Handbook of rules governing financial services to take account of the new law, which means that all firms subject to MiFID will have to change their practices.

According to the FSA, this includes firms such as investment banks, portfolio managers, stockbrokers and broker dealers, corporate finance firms, many futures and options firms and some commodities firms.

A recent survey revealed that 64 per cent of firms in the UK are struggling to cope with the demands of the new rules. Think tank JWG-IT said that that proportion of financial services firms are finding it hard to cope with requirements to keep records in a different way. The new rules demand that files are kept for five years after an event, and for the duration of the relationship with a client and sometimes longer.

The new law replaces laws deriving from the Investment Services Directive, which is being repealed.

Only the UK, Ireland and Romania have managed to meet the deadline of 31st January for implementing the Directive, though most others have implemented it since then. Spain and Poland will not be compliant before today’s deadline, the European Commission has said.

The BBA said that the changeover to the new rules has already cost the financial services sector significant sums of money. "This week sees the culmination of many years of very hard bargaining by virtually everyone who has ever taken an interest in financial services," said BBA executive director for wholesale banking Micahel McKee. "The major European financial firms have already spent some years and millions of pounds preparing for this change, but as with all change there are likely to be some winners and losers."

McKee said that the UK was, though, better placed than most places to take advantage of the changes and the potential increase in the number of markets available to firms. "London is the world's financial capital – its concentration of expertise, experience and financial acumen put it in pole position to reap the benefits of this harmonisation in the future," said McKee. The BBA said that all is not lost for smaller firms. Those that embrace the change could benefit, it said. "Smaller banks will reap the best benefit from MiFID by using it to differentiate their service offerings from their competitors," said the BBA statement. "Private banks will, however, be pressed to combine the new regulatory requirements with their traditionally bespoke services to clients."